The NCLAT on the Ability of a Power of Attorney Holder to Initiate Insolvency Proceedings

In Palogix Infrastructure Pvt. Ltd. v. ICICI Bank Ltd.(decided on 20 September 2017), the National Company Law Appellate Tribunal (“NCLAT”) held that a power of attorney holder is not authorised to present an insolvency application under sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). It is only authorised representatives, duly authorised by board resolution, who are eligible to present the same. This is based on the simple rationale that a company being juristic person acts only through its board of directors, who can exercise all powers that the company is entitled to exercise, and it may through a resolution authorise any person to present an application. Further, officers authorised by the board cannot in turn give a power of attorney to any other person. The goal of this post is to discuss the NCLAT ruling and its impact.

Facts of the Case

ICICI Bank Ltd. (the “financial creditor”) filed an application under section 7 of the IBC for initiation of the corporate insolvency resolution process (“CIRP”) against Palogix Infrastructure Pvt. Ltd. (the “corporate debtor”).

The case was first heard by a two-member bench of the adjudicating authority (viz., the National Company Law Tribunal (NCLT)). Having noticed that the financial creditor preferred the application through a power of attorney holder, the NCLT passed two separate orders: one held that the application through power of attorney is not maintainable (Judicial Member), and the other that the application was maintainable (Technical Member). The Technical Member found that the power of attorney was given in favour of the Legal Manager to initiate proceedings before the NCLT.

The case was then referred to the President, NCLT, exercising power under section 419(5) of the Companies Act, 2013 (the “Companies Act”) for constituting a larger bench for decision, wherein by majority judgment, the NCLT held that there should be specific authorisation to the power of attorney holder to initiate the CIRP. Since the financial creditor had not filed such specific authorisation, it was directed to rectify the defects.

The Financial Creditor challenged the said order on appeal before the NCLAT on the ground that no specific authorisation is required for initiation of the CIRP.

Issue For Determination

The key issue before the NCLAT was whether the constituted attorney authorised to file suits or proceedings against the company for recovery of the amount and also to affirm plaints and affidavits and other pleadings in any court of India, including NCLT, can file an application for initiation of corporate insolvency process under section 7 of the IBC.

Discussion of the Law

Rule 2(6) of the National Company Law Tribunal Rules, 2016 (the “NCLT Rules”) defines an “authorised representative” to be a person authorised in writing by a party to present his case before the NCLT as the representative of such party, as provided under section 432 of the Companies Act. Since the said rule had not been adopted under the IBC or rules framed thereunder, the NCLAT was of the view that no reliance can be placed on such rule. Order III of the Code of Civil Procedure, 1908 (“CPC”) provides for recognised agents and pleaders, but the CPC is not applicable for filing an application under the IBC.

Section 179 of Companies Act empowers the board of directors to do all such acts that a company is authorised to do. A company being a juristic person is capable of initiating and defending legal proceedings and, therefore, the board of directors is empowered to exercise such rights on behalf of the company, or it may duly empower an authorised representative to do so on its behalf. By this, the person authorised by the board of directors is duly empowered to initiate or defend any legal proceedings by or against the corporate debtor in any court of law, including the matters relating to insolvency and bankruptcy proceedings.

A power of attorney is an authorisation by a ‘principal’ to its ‘agent’ to do an act. A fortiori, such authorisation can only be of acts which are in the contemplation and knowledge of the principal as on the date when such authorisation is given. If the principal itself is unaware of an eventuality, it cannot authorise its agent for such eventuality. This is more so when the IBC sets in motion a very serious and irreversible process; therefore, the procedural pre-requisites under the IBC must be strictly construed. For instance, in situations where the financial creditor executed the power of attorney, but it could not have visualised even remotely that the attorney would be required one day to initiate a corporate insolvency proceeding under section 7, the attorney cannot initiate the corporate debt resolution proceedings as he lacks the requisite authority.

For determination of questions relating to a power of attorney, it is desirable to refer section 2 of Power of Attorney Act, 1882 which reads as follows:

Execution under Power-of-Attorney: The donee of a power-of-attorney may, if he thinks fit, execute or do any instrument or thing in and with his own name and signature, and his own seal, where sealing is required, by the authority of the donor of the power; and every instrument and thing so executed and done, shall be as effectual in law as if it had been executed or done by the donee of the power in the name, and with the signature and seal, of the donor thereof. This section applies to powers-of-attorney created by instruments executed either before or after this Act comes into force.

28. The power of attorney holder is the agent of the grantor. When the grantor, authorises the attorney holder to initiate legal proceedings and the attorney holder accordingly initiates such legal proceedings, he does so as the agent of the grantor and the initiation is by the grantor represented by his attorney holder in his personal capacity.

Section 2 of the Power of Attorney Act, 1882 cannot override the specific provision of a statute which requires that a particular act should be done by a party-in-person.

On the question whether following the enactment of the IBC the situation has undergone a paradigm shift as regards insolvency of corporate debtor or liquidation thereof, it was held that a completely new regime has been put in place. The IBC is a complete code in itself. The Supreme Court in M/s. Innoventive Industries Ltd. v. ICICI Bank, 2017 SCC OnLine SC 1025, held:

52. [The IBC] is an Act to consolidate and amend the laws relating to reorganization and insolvency resolution, inter, alia of corporate persons. Insofar as corporate persons are concerned, amendments are made to the following enactments by Sections 249 to 252 and 255. …

53. It is settled law that a consolidating and amending act like the present Central enactment forms a code complete in itself and is exhaustive of the matters dealt with therein. … There can be no doubt, therefore, that the Code 4 is a Parliamentary law that is an exhaustive code on the subject matter of insolvency in relation to corporate entities, and is made under Entry 9, List III in the 7th Schedule which reads … as ‘9. Bankruptcy and Insolvency’.

Also, in Shantilal Khuslaldas and Bors Pvt. Ltd v. Smt Chandanbala Sughir Shah, (1993) 77 Comp Cas 25, and in Coromandel International Ltd. v. Chemcel Biotech Ltd., (2011) 166 Comp Cas 676, it was held that it is a settled principle of law that the power of attorney needs to be interpreted strictly, with the reason behind such principle being that the powers given are not abused by agent, or that the actions are restricted only to the extent the power is indicated or given. In the aforesaid cases, it was further held that when the grantor of a power of attorney had authorised the attorney to initiate suits, the attorney, being armed with such a power of attorney, cannot initiate a winding up proceeding since a winding up proceeding under the company law can never be equated with a suit. The relevant part of Coromandel International Ltd is reproduced below:

A suit for recovery of money is essentially a suit between the parties where no third party can seek any indulgence or impleadment. The proceedings under the Companies Act for winding up are entirely different, a special remedy provided for and the idea is not to restrict the proceedings to the parties alone and its range is widened and all steps taken in winding up proceedings are in public interest. Sometimes the relief for winding up is denied when it is against public interest.

This apart, authorisation in the case of a company would mean a specific authorisation by the board of directors of the company by passing a resolution.[1] Therefore, the application under section 7 of the IBC, if signed and filed by a ‘general power of attorney holder’ without specific authorisation is not maintainable. Also, the pre- requisites under the IBC are mandatory and they should be strictly construed; barring a specific power of attorney, no application can be entertained. In this regard, rule 10 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the “Adjudicating Authority Rules”) states that until the time rules of procedure for conduct of proceedings under the IBC are notified, an application made under section 7(1) shall be filed before the adjudicating authority (i.e., the NCLT) in accordance with rules 20, 21, 22, 23, 24 and 26 of Part III of NCLT Rules, 2016.

Rule 23(1) permits an authorised representative to present an application or petition before the tribunal. The form and manner in which an application under section 7 is to be filed by a financial creditor is provided in Form 1 of such Adjudicating Authority Rules. Upon perusal of the aforesaid rules and Form 1, it may be duly noted that the IBC and the rules thereunder recognise that a financial creditor being a juristic person can only act through an “authorised representative”. Entries 5 and 6 (Part I) of Form No. 1 mandate that the financial creditor submit the “name and address of the person authorised to submit application on its behalf” and requires the authorisation to be enclosed. Further, the signature block of Form 1 requires the authorised person’s detail to be inserted and includes, inter alia, the position of the authorised person in relation to the financial creditor.

Thus, it is clear that an authorised person of the financial creditor can make an application under Section 7. If an officer such as senior manager of a bank has been authorised to grant loan, for recovery of loan or to initiate a proceeding for the CIRP against the person who has taken the loan, in such case the corporate debtor cannot plead that the officer has power to sanction loan, but such officer has no power to recover the loan amount or to initiate the CIRP, in spite of default of debt. If a plea is taken by the authorised officer that he was authorised to sanction loan and had done so, the application under section 7 cannot be rejected on the ground that no separate specific authorisation letter has been issued by the financial creditor in favour of such officer.

Comments

One of the reasons why the NCLAT has held that a ‘power of attorney holder’ cannot file any application under sections 7, 9 or 10 of the IBC was because there may be cases where the insolvency resolution proceeding has been initiated by such person fraudulently, or with malicious intent for personal act on the part of an individual. However, proceedings made under section 7 of the IBC do not necessarily lead to liquidation of the corporate debtor. Under Section 20(1), the interim resolution professional is required make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. It may lead to liquidation or winding up in case no viable insolvency resolution plan could be evolved in consultation with the committee of creditors.

Also, in the instant case, the power of attorney clearly mentions that the legal manager is empowered to initiate proceedings under the NCLT, which automatically includes its role as an adjudicating authority under the IBC. Pursuant to the judgment of the NCLAT, every petition under the IBC involving a financial creditor must be filed on the basis of a specific power of attorney on a board’s resolution, which will defeat the very purpose of the IBC, viz. speedy resolution of insolvency cases.

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